Munich Re eyes risk-adequate rates amid growing complexities and loss trends

Munich Re eyes risk-adequate rates amid growing complexities and loss trends | Insurance Business Canada

Reinsurance

Munich Re eyes risk-adequate rates amid growing complexities and loss trends

Reinsurance demand remains robust despite challenges

Reinsurance

By
Kenneth Araullo

Munich Re is maintaining its focus on ensuring risk-adequate conditions in a challenging market environment characterized by volatile loss trends and increasingly complex risks.

Despite these challenges, the global reinsurance market is expected to grow by 2-3% over the next three years, adjusted for inflation, aligning closely with the growth of the primary insurance market. This growth is projected to be more robust in the Asia-Pacific and Latin America regions, while Europe and North America are expected to experience slightly weaker expansion.

The macroeconomic environment has shown signs of stabilization, though significant geopolitical risks persist. Global economic growth is forecast to be around 2.5% over the coming years, a reduction compared to pre-pandemic levels. While inflation is declining in advanced economies, it is expected to remain higher than the past decade’s norms.

In certain reinsurance segments, claims inflation is outstripping broader economic trends. Factors such as rising damages in the US, attributed to social inflation, escalating medical costs, and shortages in construction materials and labor have led to substantially higher claims costs.

According to data from AM Best/Guy Carpenter, global reinsurance capital has reached $515 billion in 2024, as anticipated. The market for alternative risk capital has seen modest growth, though its overall impact on the reinsurance market remains limited. Demand for reinsurance capacity has remained strong, helping to stabilize the market at higher levels.

Thomas Blunck (pictured above), a member of Munich Re’s board of management, underscored the necessity of achieving adequate earnings in the reinsurance sector. He noted that the sector had failed to earn its cost of capital in four out of the last seven years, emphasizing the importance of achieving risk-adequate rates to account for increasing volatility and exposure, which in turn require more risk capital.

Munich Re is paying particular attention to developments in several key areas. One of these is natural catastrophes and climate change, where insured losses are trending upward. Total global insured losses from natural catastrophes now frequently exceed $100 billion annually, driven by events like hurricanes and earthquakes.

However, non-peak perils such as severe thunderstorms, tornadoes, floods, and wildfires are contributing to the overall rise in insured losses. Climate change is believed to be playing a role in the frequency and severity of these hazards.

Munich Re noted that it is investing in the development of new and improved risk models, while enhancing its global diversification to maintain long-term profitability in the natural catastrophe business.

Casualty under scrutiny

The casualty sector is also under scrutiny, particularly in the U.S., where claims inflation continues to rise. Verdicts awarding higher damages have become increasingly common, a trend that has benefited specialized lawyers and litigation funders. This dynamic contributes to what Munich Re describes as a “tort tax” of about $3,600 per US household annually.

The company’s analysis has shown that rate development has failed to keep pace with claims inflation in recent years. Munich Re intends to continue supporting clients that recognize the impact of these rising costs and legal system challenges.

Cyber risk is another area of focus for Munich Re. As the global cyber insurance market continues to grow, the company is committed to providing substantial capacity to meet this increasing demand.

Munich Re plans to maintain its stance on not covering uninsurable systemic risks, such as cyber warfare, and is investing in enhancing risk and accumulation modeling in the cyber insurance sector.

Blunck remarked that while the reinsurance market has reached a sensible balance, uncertainties remain. Claims inflation is still elevated in several segments, and broader economic risks continue to pose challenges.

Munich Re, he said, will maintain a focus on achieving risk-adequate rates and conditions, using its financial strength and expertise to selectively expand capacity in areas that benefit clients.

Stefan Golling, another member of the board of management, echoed these sentiments. He highlighted Munich Re’s role as a risk carrier with significant financial resources and expertise in managing large, complex risks.

Golling noted that the company’s clients rely on Munich Re to leverage its strength and knowledge to help mitigate claims volatility. He also indicated that Munich Re would not hesitate to exit business lines that do not meet its technical criteria for sustainable profitability.

As the global risk landscape continues to evolve, Munich Re plans to remain focused on delivering the expertise and capacity its clients need, while maintaining a disciplined approach to underwriting and risk management.

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